Reliant proposal 'extreme unbundling'

After Reliant Energy Inc. splits into two separately traded companies�one regulated, one not�there will be little left but the wires and transmission system of what consumers knew in Houston of the regulated utility known as Reliant HL&P. Reliant�s version of the division is termed by Steve Schaeffer, executive vice-president of Reliant Energy, as 'extreme unbundling.'


Ann de Rouffignac
OGJ Online

After Reliant Energy Inc. splits into two separately traded companies�one regulated, one not�there will be little left but the wires and transmission system of what consumers knew in Houston of the regulated utility known as Reliant HL&P.

The retail side of the business will go to the unregulated unit to be called Reliant Resources. The power plants, including the existing company's share of the South Texas nuclear project, will more than likely be bought by Reliant Resources, too.

Reliant Resources will be spun off to the public in an initial public offering (IPO) sometime next year, if all goes according to plan. Reliant filed with the US Securities and Exchange Commission for the IPO last week.

It is unclear how the Reliant plan meshes with the concept of unbundling of Texas utilities as spelled out in Texas restructuring legislation, which specifies the unbundling concept should be accomplished by creating a holding company with three separate subsidiaries.

After the initial public offering is completed, Reliant Energy will own 80% of the common shares outstanding of the Reliant Resources. Then Reliant will completely spin off the company within 1 year of the IPO by distributing the rest of the shares to its shareholders.

The new company will own and operate a portfolio of electric power plants that are not subject to cost-based regulation and can sell the electricity at market prices. Around those hard assets, Reliant Resources will trade and market power, natural gas, and other energy related commodities as well as provide risk management services.

The company will also have a retail side and sell electric services in Texas when that market opens to competition in 2002 and in other deregulated markets throughout the US.

Once competition begins in Texas, Reliant Resources will inherit the retail customers that were served by the utility belonging to Reliant Energy. Reliant Resources intends to keep those customers and aggressively pursue other customers in Texas and elsewhere in the US.

Reliant Resources and Reliant Energy are currently negotiating the transfer of assets and liabilities from Reliant Energy to the new company. The unregulated businesses will fall into the Reliant Resources group and the transmission and distribution assets and the regulated generating plants in Texas will go to the regulated side.

As part of the restructuring law in Texas, all utilities must �unbundle� their functional activities into separate companies. While the law envisioned a holding company with three separate company affiliates�one for transmission and distribution, one for retail, and one for generation, Reliant is splitting in two with separate boards of directors and no shared officers.

'Extreme unbundling'
Reliant�s version of the division is termed by Steve Schaeffer, executive vice-president of Reliant Energy, as �extreme unbundling.�

In the meantime, before complete deregulation in Texas in 2004, the utility�s 14,027 Mw of generation will be partially spun off to the public into a separate company with Reliant Energy owning 81% of the shares.

But eventually, those power plants will probably be purchased by Reliant Resources.

Reliant Resources will have an option to acquire Reliant Energy�s 81% stake in the generating company in 2004.

�The 20% of the generating company spun off to the public will get us a market valuation of the generating assets,� Schaeffer said at a recent Gulf Coast Power Association conference.

Sources say these kinds of IPOs, spinoffs and asset transfer can take place without regulatory oversight Under Texas rules, the Public Utility Commission will be able to investigate, only if customer rates in a regulated area are impacted as a result of the transfer of assets.

On the wholesale side, Reliant Resources owns 9,231 Mw of unregulated generation located in several markets in the Mid-Atlantic, Southwest, and Midcontinent regions of the US.

Reliant warns in its IPO filing pricing information will become more transparent for energy trading and marketing as deregulation and electronic online trading accelerates. Reliant Resources expects downward pressure on profit margins in the trading marketing and risk management operations.

On the retail side, the company expects to compete mostly with other utility affiliates in the Houston service territory. And outside of Houston, Reliant Resources expects to compete with the incumbent utility�or its unregulated affiliate.

�We may face competition from other energy service providers including startup companies focusing on internet and online service. We may face other consumer-oriented service producers that may be larger and better capitalized than we are,� the IPO filing states.

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